Commonly defined, a market is efficient if prices always fully reflect available information. That market might be viewed as consisting of two major segments: an information market and pricing mechanism. The efficiency has been amply documented elsewhere. The information market, however, should be afforded increased attention. In particular, the efficiency of the information market may vary across securities and with respect to particular securities, across time. Stated another way, the degree of imperfection in the information market may vary across securities and across time, resulting in a relative efficiency phenomenon. The presence of such a phenomenon would offer research opportunities yielding a greater understanding of the functioning of the information market and the pricing of securities.

Edward Miller's basic point (see “Comment” in this issue) may be put rather briefly: If market prices follow the random walk model precisely (I assume he refers to the semi-strong form of the efficient market hypothesis), there are no gains to be made from a trading strategy which involves waiting for more attractive prices. In a fully efficient market the price is always in line with the available information and thus never becomes either more or less attractive than the relevant information set would allow.

The purpose of this paper is to develop the financing and investment policies for the multinational firm in the framework of international capital market equilibrium. The analysis incorporates foreign exchange rate fluctuations, differential international interest rates, and differential international taxes. The current valuation theories do not contain realistic treatment of these characteristics of the international financial environment. Therefore, the existing financial theory has to be amply modified if it has to accommodate multinational corporations. Nonetheless, the few notable works in contemporary financial economics, which seek to extend the theory into the international setting, are subject to significant limitations.

Traditionally, the problem of portfolio choice from risky assets has been solved by considering each asset as a probability distribution of future returns. Depending on the approach used to perform efficiency analysis, knowledge about the asset's probability distribution can be from summary to complete. Thus the mean-variance (EV) model of Markowitz [9] utilizes the first two moments of the distribution, whereas the stochastic dominance (SD) approach [3] employs the entire probability function.

Information may be the key to differential rewards from investment in capital markets. Corporate insiders are thought to have information not available to others which provides them an advantage in investment activities. This has piqued the interest of regulatory officials and investors. For example, regulators in both Canada and the United States have required insiders to report their trading activities and have placed restrictions on the nature of these activities. Additionally, investors have attempted to use information on insider trading activities as a foundation for their own investment strategies.

In the September 1975 issue of this Journal Ben Branch works out in detail an “optimal” strategy for an investor seeking to purchase or sell a security. The suggested strategy involves placing limit orders at specified prices and then waiting for the order to be filled. Hypothetical calculations indicate the magnitude of savings possible through use of the strategy. Ben Branch apparently accepts the standard random walk model and develops his theory around it. If one believes that the value of a stock is a constant and that prices fluctuate randomly, the treatment seems correct.

The phenomenal growth in corporate merger activity of the 1960s revived interest in the motives and effects relating to corporate mergers. In recent years, many theories for explaining mergers have been discussed and tested in the literature of finance, law, and economics. Various authors have argued that motives for merger include increased market power [15, 21, 23], achievement of operating or managerial scale economies [2, 8], diversification [6], tax reduction [19], growth maximization [14, 16], and bankruptcy avoidance [7, 10, 12, 13]. The bankruptcy avoidance motive is perhaps the most recently articulated of all merger motives, and perhaps the only one for which no systematic attempts at empirical validation have been forthcoming.

During the late 1960s and throughout the 1970s, a myriad of tests of the two-parameter capital asset pricing model (hereafter CAPM) have been executed and reported in the literature. Relatively recently, much attention has been focused on the asymmetry—skewness—of realized asset, portfolio, and market return distributions. The intent of the present effort is to report the results of an investigation of the asymmetry of one of these variables—the returns of the market portfolio.

The purpose of this study is to build and test a statistical model for the dynamic estimation of portfolio Betas. Of particular interest is the quality of Beta estimates obtainable from relatively small samples of daily return data. Also of particular interest is an assessment of the relationship between the quality of these estimates and the degree of portfolio diversification.

In a recent paper Lloyd and Shick (LS) [4] report empirical results of tests of Stone's [7] two-factor model. Based on a sample of 60 banks and the 30 Dow Jones stocks, LS conclude that their findings generally support Stone's model. That is, an “interest rate risk” proxy appears to explain an additional portion of the variability of the sampled security returns over and above the variability due to an equity market proxy.

In a recent article Lloyd and Shick [3] examined a two-index model of bank stock returns with interest rates as the extra-market source of covariance. Based on their findings, the authors were optimistic that the inclusion of an interest rate index would prove to be worthwhile in market model regressions. The purpose of this comment is to question their conclusions by pointing out some specific deficiencies concerning their data, the statistical tests, and their interpretation of the results.

The classical Capital Asset Pricing Model of Sharpe [5] and Lintner [4] has been generalized by Brennan [2, 3] to include the effect of investors' taxes. In Brennan's formulation, investors' portfolio incomes are divided into capital gains and ordinary income components whose marginal tax rates differ both from one another and across investors. In this paper, Brennan's model is further generalized to admit tax–exempt portfolio income as well. The results, which may accord with empirical data better than have those of the less general models, include a three–fund separation theorem, a three–term Capital Asset Pricing Formula which relates the excess rate of return of any risky portfolio to those of three fundamental risky portfolios whose rates of return are pairwise uncorrelated, and a representation suitable for empirical testing.

In a recent paper, the author [8] has derived the equilibrium bond pricing equation in a world of uncertain future interest rates assuming that capital gains and losses will be taxed at maturity at capital gains tax rates. In the case of premium bonds (i.e., bonds selling above par), the U.S. tax law allows bondholders to elect to amortize the premium on a straight line basis as a deduction from regular taxable income. For those paying positive tax rates, the amortization option will generally be advantageous compared to taking a capital loss at maturity.

Trading in currencies in order to obtain the best possible exchange rate is known as arbitrage and can broadly be divided into three categories:

1) Space Arbitrage––transactions to take advantage of discrepancies between rates quoted at the same time in different markets.

2) Time Arbitrage––transactions to take advantage of discrepancies between forward margins for different maturities.

3) Interest Arbitrage––transactions to take advantage of discrepancies between yield on short-term investments in different currencies. This form of arbitrage can be split into (a) Covered and (b) Uncovered (speculative) interest arbitrage. The former variety uses today's forward rate for forward conversion back into our holding currency; the latter allows the dealer to use the spot rate existing in the future.

Economists generally agree that a basic characteristic of a good tax is economic neutrality. That is, a tax should not influence economic behavior unless it was intentionally designed to produce a specific effect. In this context, the economic effects of the current system of capital gains taxation in the United States have been the subject of considerable concern. Most researchers have concluded that the current system of capital gains taxation has an undesirable and destabilizing effect on the securities markets because the practices of taxing capital gains only when they are realized and, correspondingly, allowing tax deductions for capital losses only upon realization, presumably cause investors to defer the realization of capital gains and to accelerate the realization of capital losses. Based upon this behavioral assumption, many economists infer an effect on the securities markets.

An algorithm to estimate the composition of efficient sets by the stochastic dominance (SD) rules was developed and made available to the public by Porter, Wart, and Ferguson (PWF) [1]. Up to that time the computer central processing unit (CPU) time required for the determination of the SD efficient set was prohibitive for a large number of portfolios. The Porter, Wart, and Ferguson algorithm made possible studies that examined the performance of mutual funds, common stocks, and portfolios using the SD rules. Unfortunately, the FORTRAN program developed by PWF and titled D0MIN2 still requires a large amount of CPU time when the number of portfolios exceeds 100.